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January 22, 2014

El-Erian’s PIMCO Exit: A Game Changer?

Experts say he wasn’t pushed out, but it may prove difficult for the bond shop to fill his shoes at the firm and in the media

PIMCO’s announcement on Tuesday that CEO and co-CIO Mohamed El-Erian would soon leave those roles but stay on as a board member of parent company Allianz continued to ripple through the financial world on Wednesday.

Morningstar analyst Eric Jacobson, among others, shared the mixed views of other experts on the news affecting the Newport Beach, Calif.-based bond shop, which had close to $2 trillion in assets under management as of Sept. 30.

“I think it’s of minimal short-term significance, but could potentially have a very long-term impact on the firm,” Jacobson said in an interview with ThinkAdvisor.

Also, the Morningstar expert doesn’t think El-Erian was nudged out.

“I don’t believe that PIMCO’s outflows or the Total Return Fund’s 2013 difficulties likely had much to do with this departure, nor do I expect that he was pushed,” Jacobson said.

Others, like Chip Roame, managing principal of Tiburon Strategic Advisors, agree. “I highly doubt he was pushed out because of one off year,” the consultant said in an interview.

His exit, more likely, is related to other issues. “He has been a very busy guy, making appearances everywhere on behalf of PIMCO. He relocated to Boston a few years ago [to work for Harvard’s endowment] and then went back. He may just need a break, or he may want to do something different,” Roame added.

Investment Woes

Still, PIMCO’s reorganization may be tied at least partially to its poor showing last year, when the PIMCO Total Return Fund (PTTAX, PTTRX) had about $41 billion of outflows. It lost 2.3% in 2013 vs. losses of 1.3% for its category, according to Morningstar. Its asset base is about $237 billion; the fund's ETF shares (BOND) are about $3.5 billion.

Several other PIMCO funds did have inflows in 2013, Jacobson says. “Overall, the firm saw $25.9 billion in net outflows from mutual fund and ETF businesses (combined), which is a relatively modest sum compared with the firm’s overall assets under management,” he noted.

El-Erian has been a lead manager of two funds: PIMCO Global Advantage Strategy Bond (PGSAX) and PIMCO Global Multi-Asset (PGMAX), which have total assets of $3.5 billion and $2.3 billion, respectively. The multi-asset fund declined 8% in 2013 while funds in its Morningstar category improved 9% in the same period.

“If history is a guide, PIMCO will quickly promote his current co-managers to lead roles and more than likely appoint additional managers to back them up. Meanwhile, El-Erian's operational responsibilities appear to be in good hands with the promotion of COO Douglas Hodge to the CEO position,” Jacobson wrote online late Tuesday.

The leadership changes to come at PIMCO return the firm to a management structure that resembles what it had in place before El-Erian became CEO, he adds.

On the other hand, the shift leave a "a bigger question mark," according to Jacobson.

"El-Erian has been a crucial, senior voice on PIMCO's investment committee and one of only a handful of people who have likely had the right mix of traits necessary to strongly challenge and help influence [co-CIO Bill] Gross' opinions. His loss is particularly significant given the retirement of Paul McCulley in December 2010," the Morningstar analyst explained in an online article.

While there are "top-notch people" on and about to become part of the investment committee, only time will tell if they "will be able to effectively play the devil's advocate role in that group, a role Gross has always professed to value highly," notes Jacobson.

Future Face of Firm

Apart from changes at PIMCO, El-Erian’s departure is expected to leave a fairly sizeable hole in daily discussions and media coverage of global financial news and PIMCO’s prominent role in these debates.

“In terms of the general investor community, it will be interesting to see how much or whether El-Erian steps back significantly from the public eye,” the fund analyst said. “He plans to remain involved in advising Allianz on economic and policy issues, and has signaled that he may continue writing, something with which he has been very prolific.”

Meanwhile, speculation on El-Erian's next move is running rampant, including conjecture that he might be tapped for the Federal Reserve Board of Governors, a role that would certainly put him back in the public spotlight.

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